There are a range of advantages and disadvantages with an SMSF. Listed here are the main considerations, some of these may also apply to other superannuation structures.
| Advantages vs Disadvantages | |
|---|---|
|
Control |
Time burden |
|
Family fund |
Non-compliance penalties |
|
Flexible Income stream choices in retirement |
Costs for smaller balances |
|
Investment freedom |
No loans to members |
|
Flexibility |
Limited related party transactions |
|
Fees |
No access to super compensation scheme |
Member Insurance
(life cover, total and permanent disability, salary continuance)
In addition to the advantages/disadvantages listed, an additional consideration should be the insurance arrangements for members. There is no automatic insurance cover for members in an SMSF, the trustees would need to make these arrangements. In other forms of superannuation there may be automatic insurance cover, therefore you should always check what cover you have with your existing superannuation and especially before you cease all your membership of other schemes.
Advantages of a SMSF
Control: The fund assets are controlled by the trustees who are also the members. The trustees have responsibility for all decisions.
Family Fund: Up to four members of your family can participate in the fund and reap the rewards.
Secure Income in Retirement: A SMSF offers the most flexible option for taking your benefits in retirement, whether the benefits are taken as a lump sum or pension.
Investment Freedom: The trustees have absolute discretion (within the rules) with respect to the choice and mode of investment.
Taxation: Superannuation enjoys the lowest rate of tax of any entity in Australia. The fund pays a maximum (except for penalties) rate of 15% tax and may be reduced by offsetting other tax credits.
Fees: The SMSF fee structure may deliver substantial savings when compared with other retail type superannuation funds. But you need to check your other options and typically a SMSF with a balance below $200,000 is not going to be cost effective.
Flexibility: Trustees have the flexibility to make decisions with respect to changing market movements and options for retirement income streams.
Creditor Protection: A member’s fund assets may be protected from creditors in the event of bankruptcy.
Disadvantages of a SMSF
Time Burden: There may be a burden on the time of trustees to sign documents and manage the fund investments. However, this may be reduced by using a specialist administration service such as Super Plus.
Risk of Non-Compliance: The cost to the fund of non-compliance could potentially be a 45% tax penalty on the fund and prosecution of the trustee(s). There is also a ATO penalty regime, where there are penalties up to $10,800 for certain breaches and these penalities are payable by the trustees. If individual trustees that is each trustee is liable for a penalty, so 4 individual trustees, $10,800 each. These can’t be paid out of the SMSF.
Costs: Ongoing cost to operate the fund may be prohibitive for members with small balances. If the total value of the SMSF (ie total value of all members) is below $200,000 the SMSF is unlikely to be cost effect.
Superannuation Compensation Scheme (SCS): SMSFs are not part of the superannuation compensation scheme. Other superannuation schemes such as retail or company schemes may be members of the SCS and this may provide compensation to members for losses in certain circumstances.
Cannot Loan Money to Members or Related Parties: A SMSF must be used for the benefit of members or their beneficiaries on retirement, disablement or death. It cannot be used to provide benefits outside these parameters, such as loans to members.
SMSF Risks and Costs
Read our SMSF Risks and Costs guide, which covers in some more detail some of the risks and costs you should consider when thinking of an SMSF. see our new SMSF setup page.
